While this blog has published a multitude of stories about homeowner’s insurance companies delaying, denying and lowballing policyholders, an insured often has the ability to fight back by bringing a claim for insurance bad faith. Depending on the circumstances and jurisdiction, a bad faith claim can include attorney fees, punitive damages, emotional distress and other forms of extra-contractual damages. However, homeowner’s face a difficult situation when an insurance company fails to properly handle their claim under a policy issued pursuant to the National Flood Insurance Act. The threat of bad faith damages generally are unavailable as a remedy in such cases as recently outlined by a federal court in New Jersey.

In Ryan v. Selective Insurance Company of America, the homeowners purchased a policy providing flood coverage for two residences. The homes were destroyed by tidal flooding during Hurricane Sandy. The insurance company failed to pay a claim brought under a Standard Flood Insurance Policy (SFIP), and the insured sued for breach of contract as well as tort claims seeking extra-contractual damages. The insurance company sought dismissal of the extra-contractual damage claims because they are not authorized by the National Flood Insurance Act or related regulations.

The insurance company issued the SFIP policy as a participant in the “Write-Your-Own” policy program under the National Flood Insurance Program (NFIP). The standardized terms and conditions of all SFIP policies are set forth in 44 C.F.R. Part 61, Appendix A(1). Private insurance companies can furnish SFIPs that include terms and conditions enumerated by the governing regulations through the “Write-Your-Own program.

In seeking dismissal of the insured’s claim for extra-contractual damages, the insurer relied on the policy language of Article I of 44 C.F.R. pt. 61 app. A(1) that provides an insured is to be covered for “direct physical loss by or from flood.” The insurer also claimed that its position had a Constitutional dimension under the Appropriations Clause. The insurer argued that the provision only allowed federal money to be paid from the Treasury if authorized by statute.

In evaluating the insurer’s position, the court cited prior case law that supported the position that state bad faith laws and extra-contractual remedies under state law were preempted by the National Flood Insurance Act (NFIA). The court cited prior case law indicating the NFIA “specifically preempts state principles of contract law for purposes of the interpretations of policies issued pursuant to the NFIA.”

The court then turned to claims for extra-contractual damages under federal law. The appellate court relied on prior case law finding that damages for mental and emotional distress, punitive damages and attorney fees were not available for arbitrary denial of coverage because they were not authorized by Congress. Although the court pointed to an opinion that denied extra-contractual damages based on contract theories, the court found no reason that such reasoning would not also apply to tort claims like bad faith. The court also reasoned that claims for extra-contractual damages were not a direct loss from flooding but an indirect financial claim arising from the insurer’s handling of the claim.

While an experienced Florida insurance coverage attorney can assist with any type of coverage dispute, flood insurance coverage disputes are even more complicated because of the unavailability of bad faith remedies under state law.

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